Question

On June 30, 2018, Marigold Corp. granted compensatory stock options for 74200 shares of its $20 par value common stock to certain of its key employees. The market price of the common stock on that date was $34 per share and the option price was $28. The Black-Scholes option pricing model determines total compensation expense to be $903000. The options are exercisable beginning January 1, 2021, provided those key employees are still in Marigold’s employ at the time the options are exercised. The options expire on June 30, 2022. On January 4, 2021, when the market price of the stock was $44 per share, all 74200 options were exercised. What should be the amount of compensation expense recorded by Marigold Corp. for the calendar year 2020 using the fair value method?

Answer 1

$301,000

Step-by-step explanation:

total stock options = 74,200

total compensation expense = $903,000, issued June 30, 2018 and can be exercised January 1, 2021.

We are not given a compensation period, but since the stocks can be exercised at the beginning of 2021, we can assume the compensation period was 2018 - 2020.

to determine the cost per year using the fair value we must divide the total compensation expense by 3 years = $903,000 / 3 years = $301,000 compensation expense per year